11/14

Nov 14, Fri: Development II

Required Readings (15 pages)
• Jeffry A. Frieden, David A. Lake, and Kenneth A. Schultz, World Politics:

Interests, Interactions, Institutions, 4th ed., (New York: W. W. Norton & Company, 2019), pp. 445-459 (on Brightspace)

The provided text, excerpts from a textbook on world politics and development, offers a comprehensive overview of the economic strategies and challenges faced by less developed countries (LDCs) over the past century. It details the shift from relying on primary products to implementing Import-Substituting Industrialization (ISI), a policy aimed at replacing imports with domestic manufacturing. The text then discusses the move towards Export-Oriented Industrialization (EOI), adopted successfully by East Asian economies, and the subsequent widespread adoption of globalization policies, often referred to as the Washington Consensus. Finally, the sources examine the role of foreign aid versus trade in promoting development, the persistent power disparities between rich and poor nations in international institutions, and the crucial impact of domestic political institutions on a country's development trajectory.

Briefing on Development Policies, Politics, and International Factors

Executive Summary

This document synthesizes the core drivers, historical shifts, and persistent challenges in economic development for Less Developed Countries (LDCs). The central conclusion is that while international factors create significant constraints, domestic interests and institutions are the principal determinants of development outcomes. The historical trajectory of development policy has seen a dramatic shift from post-colonial, state-led, inward-looking strategies to a widespread, though often fraught, embrace of global economic integration.

The dominant development strategy from the 1930s through the 1980s was Import-Substituting Industrialization (ISI), which aimed to build domestic manufacturing behind high trade barriers. While this led to rapid industrialization in some nations, it often resulted in inefficient industries, agricultural neglect, and vulnerability to economic shocks. In contrast, a handful of East Asian economies pursued Export-Oriented Industrialization (EOI), using state intervention to promote manufacturing for global markets. The success of these "Asian Tigers," coupled with the devastating 1980s debt crisis that crippled ISI economies, led to a global shift toward the Washington Consensus—a set of policies emphasizing trade liberalization, privatization, and openness to foreign investment.

However, this turn toward globalization has produced mixed results. While countries like China and India have experienced rapid growth, many others have faced debilitating financial crises, slow growth, and rising inequality, fueling a political backlash in some regions. Concurrently, the international economic system remains biased toward the interests of rich nations, evidenced by their disproportionate power in institutions like the IMF and their resistance to liberalizing sectors like agriculture. LDCs have attempted to counter this through collective action, such as the Group of 77 and commodity cartels like OPEC, but have achieved limited success in fundamentally altering the international order. Foreign aid, often proposed as a solution, is unlikely to be a primary driver of development due to its small scale, potential for misuse by recipient governments, and frequent allocation based on donors' geopolitical interests rather than poverty alleviation.

The Evolution of Development Strategies

Pre-1914: Primary Product Export Focus

Prior to 1914, most developing regions, whether independent or colonial, focused their economies on the production and export of primary products like agricultural goods and raw materials. Dominated by interests vested in selling abroad, these economies generally embraced openness, including relatively free trade, the gold standard, and inflows of foreign capital.

1930s–1980s: Import-Substituting Industrialization (ISI)

Beginning in the 1930s, the collapse of foreign markets during the Great Depression and the dislocations of two world wars forced developing countries to turn inward. This evolved into a conscious strategy known as Import-Substituting Industrialization (ISI).

• Core Goal: To reduce imports and encourage domestic manufacturing by substituting local products for previously imported goods.

• Supporting Interests: The influence of traditional export-oriented elites (plantation owners, miners) waned and was supplanted by urban groups, including business and middle classes and the industrial working class, who strongly supported ISI. This shift was prominent in both Latin America and the newly independent nations of Africa and Asia.

• Key Policies:

  • Trade Barriers: Protection of domestic manufacturers from foreign competition.

  • Government Incentives: Subsidies to industry, including tax credits and cheap loans.

  • State Ownership: Government provision of basic industrial services such as electric power, telecommunications, and transport.

• Outcomes and Weaknesses: ISI led to rapid industrialization, and by the 1970s, major countries like Brazil, Mexico, and India were nearly self-sufficient in manufactured goods. However, the strategy had significant drawbacks:

  • The protected industries were often inefficient, technically backward, and produced low-quality goods.

  • These industries struggled to sell their products in competitive international markets.

  • A bias against agriculture impoverished farmers, leading to mass migrations to already strained cities.

  • The inability to increase exports left these economies vulnerable to crises, such as the 1970s oil price shocks.

1960s–1980s: Export-Oriented Industrialization (EOI)

Beginning in the mid-1960s, a small number of East Asian countries—South Korea, Taiwan, Singapore, and Hong Kong—pioneered an alternative strategy of Export-Oriented Industrialization (EOI).

• Core Goal: To spur manufacturing specifically for export to foreign markets, particularly the United States.

• Key Policies: Like ISI, EOI involved substantial state intervention. However, the government's aim was to push industry outward, using tools like low-cost loans, tax breaks for exporters, and a weak currency to make products artificially cheap.

• Outcomes: This approach forced national manufacturers to meet rigorous international standards of technology, quality, and price. The "Asian Tigers" achieved extraordinary success. For instance, South Korea's exports surged from $385 million in 1970 to $15 billion in 1979. These economies weathered the 1980s debt crisis far better than their ISI counterparts.

1980s–Present: The Turn Toward Globalization

The devastating debt crisis of the early 1980s dealt a fatal blow to ISI. ISI economies struggled to generate the export revenue needed to service their debts, while the EOI nations recovered relatively quickly. This contrast, combined with pressure from industrialized countries and international financial institutions, spurred a global shift.

• The Washington Consensus: This term, coined by economist John Williamson, refers to the array of market-oriented policies that became dominant. Key recommendations included:

  • Trade Liberalization: Removing barriers to imports and exports.

  • Privatization: Selling government-owned enterprises to private investors.

  • Fiscal and Monetary Discipline: Avoiding large deficits and high inflation.

  • Openness: Encouraging foreign investment and international capital flows. By the late 1980s, nearly all developing countries had abandoned ISI in favor of greater integration into the global economy.

The International Context and Power Imbalances

The international system presents significant obstacles to development. Power disparities between rich and poor countries mean that interactions, from trade negotiations to the setting of institutional rules, are typically decided in favor of the rich.

Bias in International Institutions

The principal international economic organizations were created largely by powerful, wealthy countries, and their policies reflect the concerns of their founders.

• Formal Bias: In the International Monetary Fund (IMF), voting power is weighted by economic size, giving developed countries dominant influence.

• Informal Bias: In other organizations, the greater wealth and power of the industrialized world ensure their interests are prioritized.

IMF Voting Power Distribution (2017)

Source: International Monetary Fund

LDC Responses and Collective Action

Developing countries have long sought to use their collective numbers to reform the international economic order.

• The Group of 77: Formed in 1964 at the UN, this coalition of developing countries (now with over 130 members) seeks to use its collective power to advance its economic interests.

• New International Economic Order (NIEO): In the 1970s, the Group of 77 pushed for the NIEO, a set of proposals to renegotiate the global economic order to favor poor nations. These efforts resulted in UN resolutions but achieved little of a concrete nature.

• Commodity Cartels: The most striking success in LDC collective action came from the Organization of the Petroleum Exporting Countries (OPEC). In 1973, OPEC restricted oil supply, causing prices to skyrocket and dramatically shifting wealth to its members. Its success was unique due to the lack of substitutes for oil, the concentration of reserves in a few countries, and political solidarity. Other commodity cartels (for copper, coffee, etc.) failed to replicate this success.

• The Group of 20 (G20): The recent rise of large developing economies like China, India, and Brazil has led to their inclusion in forums like the G20, suggesting a partial opening of global economic discussions. Nonetheless, LDCs largely remain subject to international trends and institutions over which they have little control.

The Role and Limitations of Foreign Aid

A major debate surrounds whether foreign aid or economic reforms ("trade") is more effective at helping the global poor. While aid has achieved notable successes, it is unlikely to solve the fundamental problems of underdevelopment.

Arguments for Aid

Supporters argue that well-designed aid can incentivize recipient governments to adopt pro-poor policies, alleviate severe financial constraints, and reduce extreme social pressures.

• Success in Public Health: A major success is the Global Fund to Fight AIDS, Tuberculosis and Malaria. Since 2002, it has spent over $60 billion and is estimated to have saved 36 million lives by the end of 2019.

Arguments Against Aid and Core Limitations

Skeptics argue that aid often fails to produce lasting improvement and can even be detrimental. There are two primary reasons why aid is not a comprehensive solution:

1. Insufficient Scale: Total foreign aid is about $100 billion a year, which averages to less than $20 per person in the developing world and is dwarfed by private capital flows. Rich nations consistently fail to meet their stated goal of providing 0.7% of GDP in aid, with the actual figure being about one-third of that target.

2. Misuse and Misdirection: There is substantial evidence that aid is often misused by recipient governments for the narrow interests of elites or corrupt politicians. As Nobel laureate Angus Deaton writes, “Aid undermines what poor people need most: an effective government that works with them for today and tomorrow.” Furthermore, donor countries often give aid for geopolitical and military reasons, not primarily for poverty alleviation.

Outcomes, Criticisms, and the Path Forward

The Mixed Results of Globalization

The past three decades of reform have yielded a troubling and uneven picture.

• Successes: Countries like China and India have grown rapidly, lifting hundreds of millions out of poverty. The transformation of cities like Shanghai illustrates this dramatic development.

• Failures and Discontents: Many other developing countries have grown slowly or not at all. The turn toward globalization has also been marked by:

  • Financial Crises: Debilitating crises have affected countries like Mexico, Thailand, and Argentina when massive capital inflows suddenly stopped.

  • Rising Inequality: Even in fast-growing countries, the gap between rich and poor has often widened.

  • Political Backlash: Disappointment with these outcomes has contributed to the electoral success of politicians in countries like Venezuela, Bolivia, and Iran who are highly critical of economic openness.

The Primacy of Domestic Factors

While the international environment can be unfavorable, it does not fully determine outcomes, as evidenced by the divergent paths of countries like Botswana and Zambia. The analysis concludes that domestic forces are the principal factors affecting economic development.

• Domestic Interests: Powerful internal groups can block the adoption of policies—such as improvements to education, infrastructure, or social services—that would promote broad-based economic growth.

• Domestic Institutions: The political institutions of a nation are crucial. A well-functioning democracy, for example, can reduce the influence of corrupt officials and self-interested groups, allowing for the pursuit of policies that benefit society as a whole.

This conclusion is cautiously optimistic. It suggests that the future of developing nations is largely in their own hands rather than being dictated by geography or the international system. However, this optimism is guarded, as changing the domestic interests and institutions that have held back development for generations remains an immensely difficult challenge.

1. Describe the primary economic focus of most developing regions before 1914 and the political conditions that supported it.

2. What is Import-Substituting Industrialization (ISI) and what were its three main policy components?

3. Explain the key weaknesses of the ISI model that led to its decline by the early 1980s.

4. How did Export-Oriented Industrialization (EOI), as practiced by the "Asian Tigers," differ from ISI?

5. What was the "Washington Consensus" and what types of policies did it generally promote?

6. What is the Group of 77, and what was the goal of its proposal for a New International Economic Order (NIEO)?

7. Identify the key reasons why the Organization of the Petroleum Exporting Countries (OPEC) was uniquely successful as a commodity cartel.

8. According to the text, what are the two primary reasons that foreign aid is unlikely to be a major solution for underdevelopment?

9. Summarize the core disagreement in the "aid vs. trade" debate regarding the best way to help the global poor.

10. How do international economic institutions like the IMF and World Bank exhibit a bias that can be unfavorable to developing nations?

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Answer Key

1. Before 1914, most developing regions focused their economic efforts on primary products such as agricultural goods and raw materials. This export-oriented approach was supported by political institutions, both in independent and colonial states, that were dominated by those with interests in selling goods abroad.

2. Import-Substituting Industrialization (ISI) was a set of policies pursued from the 1930s to the 1980s to reduce imports and encourage domestic manufacturing. Its main policy components were trade barriers to protect domestic manufacturers, government incentives like cheap loans and tax credits for industry, and state provision of basic industrial services like power and transport.

3. The ISI model's primary weaknesses were that it encouraged industries that were inefficient, uncompetitive in international markets, and had difficulty exporting goods. This created a bias against exports, which made it hard for countries to earn money for essential imports and left them vulnerable to crises like the oil price shocks of the 1970s.

4. Unlike the inward-looking strategy of ISI, Export-Oriented Industrialization (EOI) pushed manufacturers to produce for foreign consumers. EOI governments used techniques like low-cost loans and weak currencies to promote exports, which had the advantage of forcing national manufacturers to meet rigorous international standards for technology, quality, and price.

5. The "Washington Consensus" refers to the general acceptance of market-oriented policies that became the dominant development strategy in the 1980s and 1990s. It promoted policies such as trade liberalization, the privatization of government enterprises, fiscal and monetary policies to avoid deficits and inflation, and openness to foreign investment.

6. The Group of 77 is a coalition of developing countries within the UN, formed in 1964, that seeks to use its collective power to reform the international economic order. The New International Economic Order was its proposal in the 1970s to renegotiate the global economic system to be more in line with the needs of poor nations, such as by revising trade agreements and enhancing LDC influence in international organizations.

7. OPEC was uniquely successful for several reasons: there were few readily available substitutes for oil, a small number of members controlled a very large share of world reserves, and the cultural and political solidarity among its key Middle Eastern members strengthened cooperation. This allowed them to effectively restrict supply and drive up prices.

8. First, the amount of aid given is small, averaging less than $20 per person in LDCs and far below the target of 0.7% of rich countries' GDP. Second, there is substantial evidence that aid is often misused by recipient governments for narrow purposes or given by donor countries for geopolitical reasons rather than poverty alleviation.

9. The "aid vs. trade" debate centers on whether it is more effective to give money directly to developing countries or to encourage them to adopt economic reforms that integrate them into the world economy. Supporters of aid believe it can incentivize pro-poor policies and save lives, while skeptics argue it can be misused by corrupt governments and that trade-oriented policies offer a more sustainable, long-term solution.

10. International economic institutions exhibit a bias toward the interests of rich nations, which were their primary creators. This bias can be formal, as in the IMF where votes are weighted by economic size, or informal, based on the greater wealth and power of the industrialized world, leading to policies that may not favor the developmental prospects of poor nations.

lecture notes how ISI occured = trade barriers, overvalued fixed exchange rate, discourage of FDI, state owned entriprise= was not sucessful 1980s= gov had too much debt —> debt crisis 

discourage foreign direct investmnet foreign corporations / developing want to borrow money 60s+70s borrow money to spend on infrasture borrow money from  oil rich countries in economic boom /borrowed too much money \

ISI= small middle class small domestic market, few rich w/o robust middle class many poor domestic market suffered focus on domestic market / when exporting goods are not as good quality compared to EOI / products were not popular/ overvalued currency

EOI small countries but achieved by focusing on giant foreign market in U.S/ SK export clothing toys to wealthy U.S market big/ focus on developed countries demand / diif in focus on exchange rate/ undervalued weak currency promote exports/

both had trade barriers+ protectionism / protectionism is needed for growth/ is U.S a free trade county=very protectionism country 

free trade sinc e1980s enshrined =ISI disasture reagan and thature =neoliberalism

developing countries subsudies to their farmers = cant afford it = only afford 4 billion but have to spend on infrasture